Saturday 27 August 2011 19.07 EDT
First published on Saturday 27 August 2011 19.07 EDT

Bank of England policymakers could be forced to unleash a fresh wave of quantitative easing (QE) before the end of the year as Britain's fragile economy is battered by the eurozone crisis and the US slowdown, experts warn.

Ben Bernanke, chairman of the US Federal Reserve, disappointed investors' hopes of a new round of the recession-busting policy in a speech on Friday, instead urging President Obama to direct federal spending towards a new job-creation package.

But with chancellor George Osborne determined to stick to his austerity programme, the onus will be on Bank of England governor Sir Mervyn King and his colleagues to prevent the UK from sliding into a double-dip recession.

They will be watching a crucial survey of purchasing managers in the manufacturing sector this week for clues as to whether the recovery has stalled. "The underlying trend of the economy is weakening, and we'll find out in the PMIs [purchasing managers' index] just how rapidly it is weakening," said Michael Saunders, UK economist at Citi. Asked whether King and his colleagues could restart QE as soon as their September meeting, Saunders said: "Let's see how things go: they could do."

With the chaos in the eurozone undermining confidence, business groups are urging the chancellor to introduce new pro-growth measures in his autumn statement. "Across the board we've got a deterioration in confidence," said Andrew Cave of the Federation of Small Businesses. "That's in all sectors, and across all parts of the country." He is calling for targeted cuts in VAT to help key sectors – construction and tourism for example – create more jobs.

However, with the public finances tight, all but the cheapest measures are likely to be vetoed by the Treasury, and Osborne has stressed the Bank of England's role in keeping interest rates at rock-bottom levels to support growth.

Analysts at JP Morgan are forecasting a second round of QE in the UK next spring, but they warn that the rapidly deteriorating global outlook could accelerate that decision.

The Bank began the first round of the programme – which eventually totalled £200bn – in spring 2009. The drastic policy involves, in effect, creating new money to purchase financial assets, mainly government bonds.

Adam Posen, the independent American economist on the Bank's monetary policy committee, which sets interest rates, has been voting for a £50bn extension to QE since October last year, but has so far failed to persuade his colleagues to join him. However, Bank economist Paul Fisher recently used a speech to hint that more QE could be necessary, and JP Morgan's Malcolm Barr predicts that he will soon join the Posen camp: "If the September MPC minutes were to show two additional votes for more QE [in addition to Posen] it would suggest to us that an extension of QE was coming alongside the November inflation report."

One other member of the committee, Martin Weale, who has until now been noted for his fears about rising inflation rather than recession, signalled an apparent change of heart in a speech last Thursday suggesting there was "undoubtedly scope" for more QE if it were needed.

Economists are divided about the effectiveness of QE. Chris Williamson, chief economist at data firm Markit, said: "Confidence would be lifted not by more QE, but by a sense that global policymaking is becoming more co-ordinated, and more supportive of growth."

Fresh evidence that the slowdown is taking its toll on the jobs market will emerge this week from Hays, one of Britain's biggest recruitment companies. Hays is expected to reveal that in the three months to the end of June, hiring by private companies tapered off, with fees from the sector growing by just 8% against 28% six months earlier. Income from public sector fees in the same quarter is forecast to slump by 34%.

Ministers have repeatedly said they are confident that employment growth in the private sector will offset job losses in the state sector as Osborne cuts back public spending, but Hays chief executive Alistair Cox is expected to question that assumption, indicating that momentum has fallen back further over the summer and that private companies are being put off hiring because of declining consumer confidence, the sovereign debt crisis and weak economic growth.